War and Finance: The Horrific Human and Economic Costs of Armed Conflicts

Nations Must Never Discount the Risk of Escalation

“We are told that the American soldier does not know what he is fighting for. Now, at least, he will know what he is fighting against.”¹

—GENERAL DWIGHT D. EISENHOWER, (April 12, 1945)
Comments made after liberating the Ohrdruf concentration camp

The following newsletter addresses the economic and financial costs of war. It starts by describing the sheer horrors. In full disclosure, I have no military experience, so I will never know what it is like to endure such horrors. But I have read enough memoirs to know that you can never thank and honor the veterans enough who have endured them on our behalf.

Today is the 80th anniversary of D-Day, and I hope this newsletter honors the sacrifice of the many Allied soldiers who sacrificed their lives, bodies, and minds on the beaches of Normandy. I also hope it honors the sacrifice of all veterans who place themselves in harm’s way for the sake of others. Finally, I hope this newsletter serves as a reminder to those who downplay the risk of escalation in armed conflicts. Two wars that rage today, the war between Israel and Hamas, and the war between Russia and Ukraine, seem unlikely to escalate into larger conflicts, but world leaders can never be too careful when hedging the risk of such an outcome.

The Unspeakable Horrors of War

“I have to tell the story how it really was. I have to let people know the war wasn’t a musical.”²

—ROBERT HUGH LECKIE, Author of Helmet for My Pillow (1951)

In 1951, Robert Leckie and his wife sat down to watch the award-winning Broadway musical, South Pacific, but Leckie was unable to endure what he witnessed. When his wife asked why he walked out, he explained it with the above quote. He then spent the next six years writing his memoirs which revealed his horrific experiences in World War II. Robert Leckie had fought in several of the bloodiest battles on islands, such as Peleliu and Guadalcanal. The TV Series, The Pacific, is based on his memoirs, as well as those of Eugene Sledge.

When I began writing Investing in U.S. Financial History, I vowed to always stay in my lane as a financial historian. But it is impossible for financial historians to ignore the role that war plays in a nation’s finances. After all, it was the critical need to borrow during “times of public danger, especially from foreign war” that inspired Alexander Hamilton to resuscitate the nation’s credit in 1790. It was the devastation of the Fourth Anglo-Dutch War that led to the fall of the Dutch guilder and rise of the Pound sterling as the world’s dominant reserve currency in the late 1700s. Then, it was the cost of World War II that enabled the U.S. dollar to replace the Pound sterling under the Bretton Woods Agreement.

The truth is that war shapes financial and economic history to a much greater degree than is often appreciated. In addition, nations that shrewdly avoid war often benefit unexpectedly from the unforced errors of others. That does not mean that war should be avoided at all costs. There are situations in which it is the only viable option to preserve one’s way of life. The problem, however, is that nations often set the threshold too low because there is an innate tendency to underestimate the costs of combat and overestimate the probability of victory. Such miscalculations allow conflicts that are reasonably contained to escalate into global conflagrations.

Tragic miscalculation and escalation constitute the foundation of World War I and World II, and it is important to never forget these mistakes. Even though it appears unlikely that today’s regional conflicts will erupt into world war-level events, nations should be on their guard, nonetheless. Once artillery shells and bullets are unleashed, the trajectory of wars are notoriously difficult to predict. Nations which are now watching the conflicts in Israel and Ukraine from the sidelines would be wise to aggressively hedge the risk of escalation. Seemingly small missteps can lead to the fall of nations and collapse of empires.

This newsletter provides a very brief history of World War I and World War II, and then touches on the Cold War. Even this limited historical context may help explain the origins and dangers of two wars that are remnants of these conflicts: the Russian-Ukraine war and the Israel-Hamas war.

The Tragic Origin of the World Wars

“Today we know that World War II began not in 1939 or 1941 but in the 1920s and 1930s when those who should have known better persuaded themselves that they were not their brother’s keepers.”³

—HUBERT HUMPHREY, former vice president of the United States

Eighty years ago today, the Allied Powers launched a daring amphibious assault on the beaches of Normandy, France. Prior to the invasion, the tide of World War II had already turned in favor of the Allies in both the Pacific and European theaters, but the successful establishment of a beachhead on the European continent marked the beginning of the end for the Nazi regime. Within a year, the Third Reich would fall, and Adolph Hitler would finally spare the world of his toxic existence by firing a bullet into his head.

World War II officially began five and a half years earlier when Great Britain and France declared war on Germany on September 3, 1939, but an even deeper root extended back to June 18, 1919 when the draconian provisions of the Treaty of Versailles were established. But even this root does not extend far enough back in time. The deepest root of World War II extends back to June 28, 1914. If not for a tragic wrong turn in the streets of Sarajevo, it is conceivable that neither of the World Wars would have happened.

Image: Meeting to Negotiate Terms of the Treaty of Versailles

Image courtesy of United States Library of Congress

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A Fateful Wrong Turn in the Balkans

“While the standing armies of Europe were a constant reminder of possible war, and the frequent diplomatic tensions between the Great Powers cast repeated war shadows over the financial markets, the American public, at least was entirely unprepared for a world conflagration."⁴

GEORGE HENRY STEBBINS NOBLE, president of the New York Stock Exchange (1915)

Image courtesy of the United States Library of Congress.

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On June 28, 1914, the Archduke Franz Ferdinand, heir to the throne of the Austro-Hungarian Empire, arrived in Sarajevo to inspect imperial forces. Sarajevo was the capital of Bosnia-Herzegovina, which was formally annexed from Serbia in 1908. After learning of the archduke’s visit, a pro-Serbian terrorist group known as the Black Hand plotted his assassination.⁵

Immediately after arriving, the archduke and his wife, Sophie, traveled by motorcade to the Sarajevo Town Hall. Along the route, five members of the Black Hand prepared to ambush the motorcade using crudely constructed bombs. The first conspirator who tossed a bomb missed the target, and it exploded beneath the next car in the motorcade. The cars sped away and arrived at the town hall within a few minutes. After delivering a brief speech, the Archduke demanded to visit the wounded at the hospital. Meanwhile, several members of the Black Hand repositioned themselves, hoping for another opportunity to attack. Armed with only a pistol, a nineteen-year-old co-conspirator named Gavrilo Princip awaited on a side street.⁶

The motorcade departed from the town hall less than one hour after the initial assassination attempt. To reduce the motorcade’s vulnerability to a second attack, the security team planned to avoid the crowded city center by traveling along the city perimeter. In the rush to depart, the head of security neglected to notify the lead driver of the plan, and he mistakenly led the motorcade directly through the city. After being alerted to his error, the driver stopped and began to reverse course. In a horrible stroke of misfortune, the archduke’s vehicle stalled within feet of Gavrilo Princip’s improvised position. Princip fired into the vehicle striking both the archduke and the duchess. The motorcade raced to the hospital, but the Archduke Ferdinand and Duchess Sophie were pronounced dead soon after their arrival.⁷

Everybody Bluffs and Nobody Folds

“If there is to-day high probability of a war involving the great Powers of Europe, we are not left in ignorance of the chief cause. No vital interest of Germany, Russia, France, England or Italy is directly threatened. Yet they are all on the verge of war. Why? Not because they approve or disapprove of Austria’s high-handed attack on Servia [sic]. It might indeed be a localized war but for one thing. This, the Alliances, offensive and defensive, into which the leading European Powers are grouped. These treaties have been held up to us for years as the brilliant conception of statesmen to safeguard peace. But at this moment they reveal themselves as the fatal cause of war."⁸

THE COMMERCIAL AND FINANCIAL CHRONICLE (August 1, 1914)

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Few imagined that the death of the archduke and duchess of Austria-Hungary would plunge the entire European continent into one of the most destructive wars in human history. There were numerous miscalculations that explain the escalation, but at the root was the existence of inflexible defense pacts that compelled countries to mobilize their armed forces to support their allies despite having little to gain by engaging in combat. Time pressure also impaired decisions. The clock began ticking when Austria-Hungary granted Serbia only forty-eight hours to comply with a long list of concessions. Serbia failed to satisfy all demands, and Austria-Hungary declared war on July 28, 1914.⁹

The tragic irony of World War I is that the alliances that caused the war were designed specifically to prevent it. Europeans repeatedly downplayed the risk of escalation because the defense pacts had worked well for several decades. But the strategy failed in the summer of 1914, and the great powers of Europe careened toward an unwanted war to honor alliances. On one side were the Allied Powers of France, Russia, and Great Britain, and on the opposing side were the Central Powers of Germany, Austria-Hungary, and a reluctant Italy. Few politicians realized that a war of this scale was possible, and even fewer envisioned the magnitude of human suffering and economic devastation that would accompany it. Instead, as is often the case, the public greeted the initial war declarations with ad hoc celebrations to display national pride, giving little thought to the potential costs that would soon come.¹⁰

An estimated 20 million people perished in World War I. At least another 50 million died in the 1918-1919 Great Influenza, which was a pandemic made considerably worse by war-related censorship policies, crowded barracks, and horrific sanitary conditions on battlefields. Finally, from the perspective of the British, it weakened their grip on their global empire and accelerated the rise of the United States as its heir.¹¹

The High Price of Victory but Steeper Cost of Defeat

“War is never cheap, but let me remind you that it’s a million times cheaper to win than to lose.”¹²

—HENRY MORGANTHAU, U.S. secretary of the Treasury (January 4, 1942)

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Image: Stacked Cash during the Weimer Hyperinflation (1921-1923)

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World War II is so named because it was a continuation of World War I. After hostilities ended on November 11, 1918, the Allied Powers blamed Germany, and the Treaty of Versailles placed punishing conditions on them. This included draconian reparation payments, painful loss of territory, and forced demilitarization. The Treaty of Versailles contributed to the impoverishment of many German citizens and the destabilization of its government in the early 1920s. However, by the end of the 1920s, it appeared that the German economy was well on its way to recovery. The influence of Adolph Hitler’s Nazi Party — which was a menace in the early 1920s — was diminishing, and it appeared it would be relegated to a fringe movement. But the onset of the Great Depression in 1930 devastated the German economy once again and reignited the appeal for the Nazis.¹³

During the 1930s, Hitler steadily tightened his grip over his own people and expanded German territory by threatening his enemies with a return of the horrific trench warfare of World War I. After several years of appeasement, the British and French belatedly realized the nature of Hitler’s deceit when the Nazis invaded Poland on September 1, 1939. The years of appeasement, however, proved catastrophic to the Allies. During that time, Nazi forces strengthened considerably, which enabled them to launch a successful attack on Western Europe in May 1940. After overrunning British, Dutch, Belgian, and French forces in a matter of weeks, the Nazis controlled continental Europe.¹⁴

After five years of brutal combat, Germany officially surrendered to the Allied Powers on May 7, 1945. Rewinding the clock back to 1919, it must have seemed unimaginable that World War II could be worse than World War I. But the human and financial costs of World War II were far greater. An estimated 70 to 85 million people perished. Systematic genocide took the lives of tens of millions of Jews, Slavs, Chinese, and other compromised groups. Atrocities suffered by survivors and victims prior to their murders were indescribable. Cities throughout the world lay in ruins from relentless bombing and apocalyptic firestorms. Atomic weapons were used for the first (and thus far last) time in human history. And even after the defeat of the Nazis and surrender of the Japanese, horrific conditions persisted for many years throughout much of the world.

Post-War Prosperity and Onset of the Cold War

“The position of the United States after World War II was entirely abnormal and unsustainable. We came through the war unscathed. Our industrial power actually strengthened, while our potential competitors were substantially destroyed and needed our help to rebuild themselves.¹⁵

—PAUL VOLCKER, former chairman of the Federal Reserve Board

The United States was an oasis amid the wreckage of World War II. The U.S. possessed nearly 70% of the world’s gold and had a significantly strengthened industrial and technological infrastructure that was not only untouched by the devastation, but was significantly enhanced by America’s role as supplier to the Allied Powers. Many Americans remain nostalgic about the quality of life in the late 1940s and 1950s, and the exceptional wealth of the United States during this era explains much of it.

The rest of the world was less fortunate. In the decades following the end of World War II, civil wars and regional wars erupted throughout the world, as the British, Dutch, and French withdrew from their former colonies. Meanwhile, scarred by the devastating and indiscriminate killing of the Nazi war machine, the Soviet Union descended on Eastern Europe and greatly expanded its sphere of influence.

The brief alliance between the Soviet Union and United States during World War II soon transformed into a bitter rivalry, known as the Cold War. The Soviets sought to expand a communist/autocratic sphere of influence, while the United States sought to expand a capitalist/democratic sphere of influence. Proxy wars involving these two superpowers erupted in nations, such as Cuba, Vietnam, Nicaragua, and Afghanistan.

On November 9, 1989, the Soviet Union began to crumble under the weight of central planning. Soon after East Germany liberalized travel beyond the wall separating east and west Berlin, frustrated citizens began demolishing the wall with sledgehammers, and resistance quickly spread. Within a few weeks, the Dresden headquarters of the East German secret police was under siege. This event turned out to be a formative experience for future Russian president Vladimir Putin, who was one of the occupants defending the building. He has since recalled frantically burning confidential papers before fleeing from the mob.

The signing of the Beloveszha Accords on December 8, 1991 marked the official end of the Soviet Union. But even more so than the scars of World War II, the scars of the Cold War have not fully healed in Russia.

Embers of Past Wars are Now Glowing in the 2020s

Many armed conflicts over the past several decades were a product of the World Wars and Cold War. In 2024, there are two especially volatile conflicts that trace their origins to these wars. The first involves Israel and Hamas, and the second involves Russia and Ukraine. Both of these wars have the potential to escalate into something much deadlier if the combatants and their allies behave carelessly.

Israel and Hamas

The formation of Israel in May 1948 was the culmination of a long process that is impossible to summarize in a single book, much less a newsletter. A major driver of Jewish settlement in the region was the persecution that they experienced throughout the world — especially in Europe. This culminated in the Holocaust, which claimed the lives of more than six million Jews. Since Israel was established, some Middle Eastern countries and Palestinian groups have sought to negotiate a peaceful settlement. But others have sought to destroy each other entirely. Hamas, which has controlled the government of Gaza since 2006, falls squarely in the latter category.

On October 7, 2023, Hamas breached Israel’s security perimeter and proceeded to indiscriminately torture, rape, and murder more than 1,100 Israeli citizens. An additional 250 Israelis were taken hostage. Roughly half of the hostages are dead, and the fate of those who remain captive is uncertain. On October 8, 2023, Israel declared war on Hamas. The subsequent invasion of Gaza resembles a siege, which has resulted in casualties to both combatants and civilians. As of the writing of this newsletter, it is estimated than more than 30,000 Palestinians have died.

The Telltale Signs of Wars of Annihilation

There is only one attribute shared by all wars in human history: they are much more horrific than non-participants can imagine. Nevertheless, it is also true that some wars are more brutal than others; and the worst are wars of annihilation. The goal of at least one side in a war of annihilation is not simply to defeat an enemy, but rather it is to eradicate their presence altogether. Initial tactics often entail forced relocation and deportation, but when these inevitably become impractical, genocide typically follows.

There are few if any limits to the depravity of combatants in wars of annihilation. Torture, rape, killing, and mutilation of bodies are the norm rather than the exception. In 1937, Japanese soldiers killed more than 200,000 Chinese in the massacre of Nanking. Among the victims were prisoners who were used for bayonet practice or beheaded in contests in which Japanese soldiers competed to determine who could decapitate the most victims in a fixed amount of time. In the 1940s, the Nazi rampage through the Soviet Union resulted in the murder of millions of Slavs and Jews who were caught in the warpath and/or placed in concentration camps. These acts are the unmistakable signs of wars of annihilation.

Criticism of Israeli policies do not automatically equate to antisemitism — it is fair to say that Israeli governments (as well as Palestinian groups) have made mistakes and missed opportunities over the past eighty years. But those who highlight Israel’s mistakes would be unwise to persuade themselves that the savagery of the October 7th attacks was merely a tragic but anomalous war crime. Making such a categorization is only possible if one ignores the fact that the attack was meticulously planned and consistent with Hamas’s publicly stated goals: the destruction of Israel and elimination of the Jewish population from Palestine. Given this set of facts, it is unsurprising that Israel interpreted Hamas’s attack as the first act in a war of annihilation.

Risk of Escalation in the Middle East

The attack by Hamas and response by Israel is polarizing. Israel’s most powerful ally, the United States, continues to provide critical support. Iran, an outspoken enemy of Israel, remains steadfast in its support for Hamas. Many other countries throughout the world have offered varying levels of support for the two combatants, although most countries appear to lean in favor of the Palestinians.

The World Wars and the many proxy wars that occurred during the Cold War era resulted in millions of casualties. It is important to acknowledge that every casualty in war is tragic and excruciatingly painful for those affected, but by historical standards, the human cost of the Israeli-Hamas war is relatively contained. This could change, however, if the war escalates and compels allies to join the ranks of the combatants rather than remain on the sidelines.

Currently, it appears that the risk of escalation has declined after it peaked on April 13, 2024 when Iran launched more than 300 missiles and drones toward Israel in response to an Israeli attack on Iranian interests in Syria. Israel intercepted nearly all of these weapons, which halted further escalation. Nevertheless, the risk of escalation remains if only because wars are notoriously unpredictable. The emergence of a particularly cruel act or a strike in the wrong place could raise the risk of escalation considerably.

Russia and Ukraine

“First and foremost, it is worth acknowledging that the demise of the Soviet Union was the greatest geopolitical catastrophe of the century. As for the Russian people, it became a genuine tragedy. Tens of millions of our fellow citizens and countrymen found themselves beyond the fringes of Russian territory.”¹⁶

—VLADIMIR PUTIN, president of the Russian Federation

On April 25, 2005, Vladimir Putin gave an annual address in which he lamented the state of affairs in Russia. At the opening of the speech, he characterized the disintegration of the Soviet Union as one of the greatest catastrophes of the past one hundred years. This statement foreshadowed Putin’s attempts to reclaim lost territory over the next two decades.

On February 24, 2022, the Russian army began a full-scale invasion of Ukraine. The stated reasons were typical of such wars. Putin falsely cited provocation on the part of Ukrainians and expressed his desire to rescue Russians from oppression by Ukrainians. But the deeper, underlying motive appears to be Vladimir Putin’s simmering resentment for the disintegration of the Soviet Union and his desire to reclaim lost territory.

Initially, the attack on Ukraine seemed to present a terrifyingly high risk of escalation. Military experts expected Russia to quickly take control of Ukraine and then set its sights on another Eastern European country. The risk was that the next target could be a member of NATO. If this were to occur, NATO countries would be compelled to honor Article 5, which states that an armed attack on one NATO ally should be treated as the same as an attack on all NATO allies. Alternatively, NATO countries could refuse to honor Article 5 and thereby diminish the power of the alliance to deter armed conflicts.

Fortunately, the Russian military proved considerably less capable than originally feared, while Ukrainian forces demonstrated a will to resist that was far stronger than anticipated. More than two years after the war began, Russia remains mired in what seems to be an unwinnable conflict. As of the writing of this newsletter, Russia had ceded territory formerly held in northern Ukraine and only marginally expanded territory held in eastern and southern Ukraine.

World Leaders Must Tread Carefully

“America is especially fortunate in that she has no great military burden. Militarism is the nightmare and the ruin of every European financial minister.”¹⁷

—SERGEI WITTE, Russian foreign minister (1902)

In 1902, a leading American financier, Frank Vanderlip, toured the European continent to gain a deeper understanding of how the United States had suddenly leaped past Europe as the world’s dominant industrial power. Toward the end of the trip, he met Sergei Witte, the Russian foreign minister, who presciently described the effect that militarism would have on the fate of Europe in the twentieth century. The combination of World War I and World War II emptied Europe’s coffers and allowed the United States to replace the fading British empire.

World War II embers that are now aglow in eastern Europe and the Middle East seem to be relatively contained at the moment, but leaders of the great powers of the twenty-first century would be wise to take every step possible to ensure that they remain that way. War often explains the rise and fall of countries and empires. World leaders should tread carefully if they wish to prevent their people from joining the graveyard of the fallen.

1. Andre Francois-Poncet, The Fateful Years: Memoirs of a French Ambassador to Berlin, 1931-1938 (New York: Harcourt, Brace and Company, 1949), 43.

2. Robert Leckie (1957). Self-published.

3. Hubert Humphrey, “Remarks,” November 11, 1965, Veteran’s Day Service, Arlington Memorial Cemetery.

4. Henry George Stebbins Noble, The New York Stock Exchange in the Crisis of 1914 (New York: The Country Life Press, 1915).

5. Mark Higgins, Investing in U.S. Financial History (Austin: Greenleaf Book Group, 2024)

6. Higgins, Investing in U.S. Financial History.

7. Vladimir Dedijer, “Sarajevo Fifty Years After,” Foreign Affairs 42, no. 4 (July 1, 1964): 569-584.

8. The Commercial & Financial Chronicle 99, no. 2562 (August 1, 1914): 293.

9. Higgins, Investing in U.S. Financial History.

10. Higgins, Investing in U.S. Financial History.

11. Higgins, Investing in U.S. Financial History.

12. Press Release no. 29-37, The U.S. Department of the Treasury (January 4, 1942), 4, https://fraser.stlouisfed.org/files/docs/publications/treaspr/treasury_pressreleases_volume0039.pdf

13. Higgins, Investing in U.S. Financial History.

14. Higgins, Investing in U.S. Financial History.

15. Paul Volcker and Toyoo Gyohten, Changing Fortunes: The World’s Money and the Threat to American Leadership (New York: Times Books, 1992).

16. https://irp.fas.org/news/2005/04/putin042505.html

17. Frank Vanderlip, The '“American Commercial Invasion” of Europe (New York: Frank Vanderlip, 1902).